katie: real yield starts now.

coming up, markets betting on a downshift as the fed makes the case for higher rates in this as this is as issuers release a record of bond sales. recession or recovery? >> we have a fed here who is not backing down. >> they are concerned with being the fed that causes too early. members are being fairly hawkish. >> inflation it's on its way down and the economy is slowing. >> we hope the fed will engineer a soft landing. >> if we go into recession, bond yields are still too high. >> perhaps there is a little bit too much complacency on what central banks will do. >> we are not going into recession, it's the opposite. >> we think. >> a very different view. >> we are more in the stock camp. >> maybe they think 50-75 basis

points does the trick. katie: joining us now is kathy jones and eric nelson of wells fargo. the data was messy this week that what we learned about the labor market in december, it feels like there is more optimism about the economy, is that premature? >> i think what we are in is an up-and-down rolling recession type of economy with areas of real weakness like housing and disinflationary pressures stemming from the supply side coming back and consumer spending. on the other hand, you have a firm labor market still and a fair amount of rebound in terms of optimism in the global economy so it's a mixed picture.

our view is that we are still in a week -- a weakening economy and the risk is that the fed tightens into that and we will in the second half get a much weaker economy. katie: let's talk about what that means for the fed. it feels like we have the market trying to fight the fed but there is growing optimism, one that's been supported by bed numbers that there will be a further downshift in february to 25 basis points. we heard from the fred's desk the feds chris waller favoring 25 basis points at the next meeting. is it too early to downshift once again or do you think that is opiate given what we've learned? >> i think the fed is comfortable going down to 25 at this point. the question is less about the path and more about the destination but how we stay at the destination.

our view is that the market is a little bit premature in pricing in those cuts in the second half of this year. we acknowledge that 6-9 months from now, they should be rolling over in a more consistent basis and the fed will probably cut but we think there is still more runway left in the u.s. economy so we are not ready to lean into the cut in the cycle. katie: i want to talk about what that means for the bond market. in december, you made a bold call that 10-year treasury yield should be closer to 475. we are a bit closer to 350 right now. are you sticking by that call? >> it's always fun to watch the price action move against a bold call. it's been a tough chart to watching the first two weeks of the year. it's easy to get lulled in by the price action as a sign of what's to come. our fundamental view in terms of

the direction has not changed. what surprised us is inflation and wage growth in more well behaved. we would also say that the u.s. data have been shakier than we thought. we are still of the view that the fed won't be cutting for white a while but that bearish view looks a little more out of line at this point and not just because of the price action. we still expect a four handled by midyear and the 10 year treasury but that high scenario is looking less likely given the fundamental backdrop. katie: that all depends on what the fed does but what the feds action means for the economy. even though it seems the mood music is brighter, there are russians. in your view, are you on the camp of recovery or there is a recession coming? >> we are in the recovery camp at you have to acknowledge that the price action and the velocity has been oppressive in

the past couple of weeks. we are still stuck in arrangement relative to 2022 range is narrower. more importantly, we are a lot closer to the end of the tightening cycle than the beginning. it will likely continue to fuel this decline in the rates market and that's a very supportive technical factor for risk appetite. there's been a number of shifts that are important to recognize. the growth inflation trade-off has improved and there has been some weakness in the soft data in the u.s. but all the hard date is looking good and the view that the peak financial conditions on the real economy is likely behind is at this point. what that also tells you is that over time, it should create greater tolerance from central banks vis-a-vis somewhat easier financial conditions, maybe not too much easing becomes

counterproductive, but i think we will see a recalibration in the fed and ultimately the ecb reaction away from upside surprises and back a little bit into downside surprises and growth and that's a friendly shift for risk appetite. katie: let's talk more about the fed function. we heard from the fed vice chair this week, making the case for higher rates, saying that even with the recent moderation, inflation rates are high in policy will need to be sufficiently restrictive for some time to make her inflation returns to 2% on a sustained basis. kathy, it seems that that's the key part of that quote. how long do you think the fed will hike and hold? >> that's the big question in the market. what they are telling us is that they want to get five in the third quarter and hold there. if that were to be the case and

we probably should take them at their word at least at this stage of the game that that's what they believe they should be doing, then that will send bond yields even lower and raise the risk of recession and probably reduce the risk appetite in the market. that might be what the fed is intending to do and that certainly what they have done to date. we are in the camp that says if the fed follows through and does this, they are really over tightening. if inflation falls and even if they stay steady in terms of the rates with tightening policy, we still have quantitative tightening taking place the hind the scenes. that's a pretty tight policy. we still have tight policy in most of the major countries of the world. i think the big mistake here is that part of the market might be underestimating what the that decides to do and vetting

unrelenting and coming back to the market point of view in terms of easing policy sooner rather than later. this feels more like the kind of fed reaction function we had pre-financial crisis rather than post financial crisis. katie: it brings up the topic of over tightening and that's a fear that maybe was more present in the price action this week when we got the bigger than expected contraction retail sales and ppi. the concept of over tightening, when will we know that perhaps the fed is gone too far? what would that look like and how big a is that? >> inflation is coming down in the risk of over tightening is listening at the margin. i think the reality is the fed is the looking at a lot of coincident and lagging indicators to guide where policies going, a typical fed

cycle, driving through the rearview mirror. it's very challenging environment for the real economy. there is a lot of focus on lags and inherent policy and housing is the first major sector to react. corporate household balance sheets take much longer to absorb these hikes. it's very hard to see this in real time or even one or three months hence. i think the risk of over tightening particularly to the point about staying high for too long is still quite elevated. we are very kosher -- cautious on global growth and we expect another challenging year for risk. katie: on the housing market, if you are in the recovery camp, what does that mean for the u.s. housing market given the turbulence we have seen? >> housing is one of the most if not the most sensitive sector of

the economy. what you've seen over the last couple of months is a normal response to deteriorate affordability and mortgage rates. there could be a peak decline of 12-15% but the crash camp says that 30% correction and we are in the former camp. i think we are on the right track for some kind of correction. we think that will have a 25-30% klein, you have to attribute the entirety of the appreciation we had post-covid to easing financial conditions. we think there were other factors at play. the supply in the housing market was very tight and demographics played a big role into that. we are correcting but i don't think that correction is going to morph into something similar to what we experienced in

2007-2008. katie: thank you and we are just getting started. up next, the auction lock, local bond sales off to a record start. this is ♪ ♪ real yield on bloomberg.

katie: this is bloomberg real yield. time for the auction block where issuance is off to a record start. global governments and comedies have sold around $600 billion which is the biggest tally on record to start the new year. in the u.s., the big banks issued high-grade issuance with $9 billion in fresh debt.

in emerging markets, over $40 billion in bond cells mark the best start to the year in more than a decade. vestment great debt account for 92% of total issuance. sticking with em, gramercy funds is expecting significant upside ahead. >> the tension between fear of missing out and climbing the wall of worry and i think you have to look historically at dislocations we've seen in emerging markets and see some of the returns that have come out of those. over the last 25 years, we've had 11 of them and the peak to trough is down by 20% and recovery takes eight months. 12-24 months after that, you see very strong returns like 50%. katie: still with us are our guests. sticking with em, it looks like there is plenty of demand to meet the supply judging by some

of the etf inflows. how doesem debt stack up against u.s. centric debt, for example? >> you've had central banks across emerging markets hike a ton especially in latin america. you're looking at 10-15% nominal yields. despite the upside in developing market yields, the gap is still substantial. as the fed moves toward cuts, em central banks are moving in that direction that is great news for fixed income investors. there is a question about the longevity. how long can global growth hang in there? china reopening is a big wildcard but you have a negative cycle taking hold in some of these western economies. you have to be careful about chasing this rally in em. we think it can last a few

months but the second half of the year could be a different story. katie: let's talk about chasing the rally in u.s. markets. when we think about the relative value between investment-grade and high-yield. if i look over your notes, i see you are not yet ready to buy into what we are seeing in the high-yield market. what would look like a more attractive entry points? >> we would need to see spreads widen out quite a bit. we haven't had whitening spreads beyond average during this cycle yet as we go into a downturn, the fed tightening cycle, global tightening cycle is after lose underwriting standards in the last couple of years, you would expect to see some of the deterioration and credit quality reflected in wider spreads. we just haven't seen that. clearly, the yields are very attractive and that is drawing in money and your prospects are

looking pretty good. we would not be pushing it. corporate profits are still declining and economic growth is still probably likely to soften. we still have tightening by the central bank so it's not a great backdrop for high yield bonds. when you think that's an attractive return, katie: it might not be. katie:on the topic of high-yield, we had howard marks sit down with romaine bostick and talk about the recent performance. >> the current prices are roughly sustainable. when you say is the rally sustainable, they will not keep going up. yields are not going to keep coming down in my opinion. it's being dominated by people who are optimistic, people who think the recession won't be too bad or too long and that the inflation will give way and that the fed will be able to turn

accommodativei soonsh. >> are you optimistic? >> not on that subject. katie: it feels like there is some sort of consensus forming. i've spoken to many investors who favor investment grade higher-quality credit over maybe the riskier parts of the market. where you fall in that debate? >> you can frame it as overweight ig versus high-yield or within the high-yield market. the reason i continue to think that is that fundamentally, even though the cyclical out has right and, if you bring things down at a micro level, companies are basically facing a combination of much higher levels of funding costs at a time or the ability to grow earnings and offset some of that increase in funding cost is fairly limited. the first order condition to bring inflation under control is to keep growth below trend.

that combination really hurts the most, the lower you go in the quality spectrum, the closer you get to rate sensitive balance sheets and the more difficult that transition will be. to the extent there is consensus around that view, i find myself. there i think this is katie: katie: still an open quality world. i'm happier with us today because you recently revised to 2023 spread forecast tighter. what is your current expectations for how things play out this year with spreads and why the change? >> we are envisioning a return to the range that prevailed in the first quarter of 2021. it's not quite a complete reversal of the widening. i think we went through material destruction. the risk of a new monetary shock which was the biggest story of 2022, that has come down substantially. you've got signs of improvement in the growth inflation

trade-off and wage inflation cooling down and price inflation is cooling down. you look outside, the recession scenario seemed inevitable in europe only three or four months ago. now you can make the case that the odds of a recession in europe are declining in the winter has been warmer and the reopening in china is good news. credit perhaps more so than the equity market is more sensitive to the distribution and there has been a sharp decline. we are still in for a range but i think that range is narrower this year relative to where it was in 2022. katie: everyone is sticking with us because still ahead, the final spread, the week ahead with the u.s. getting its last dose of data before the february fed rate decision. this is real yield on bloomberg. ♪

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katie: this is bloomberg real yield. time now for the final spread, the week ahead coming up, euro area getting a read on the consumer on monday and then we have global pmi headlining tuesday with a canada rate decision tuesday in the u.s. closing out the week with gdp, pce and new sentiment survey on deck. we are back with their roundtable and before we get to the rapid fire round, i'm curious to hear what you are watching in the week ahead. we have absolutely no fed speak area what is your big focus next week? >> it's going to be the pce numbers. the core pce is one of the key data ways for the bed and i think for the markets. they are going to see -- need to see continued improvement in those numbers and the potential

for the fed to slow down. >> are you also keeping an eye on pce? >> absolutely that will be key and i'm watching the'pmis, europe, the u.k. with the narrative of resilience in europe and the u.k. and starting to see some data rollover in the u.s. not necessarily buying that narrative but we will see with the pci has to say. >> what is your big focus? >> i think pce will be key and we need to get confirmation we are on the right track as far as inflation. pmi and other soft data, i agree with that. katie: it's time for the rapid fire round, three questions, three quick answers. 25 basis points or 50 basis points from the fed next month? >>. 25 katie: eric? >> 25. >> 25 katie: katie:. does the fed cut rates >> >> in 2023? no. >> yes.

>> no. katie: a bit of a discussion there and to credit spreads and 2023 wider or tighter from here? >> wider. >> wider. >> tighter. katie: all right, great discussion and thank you to all of you. we have a big week ahead even though we don't have any fed speak. we have a ton of data coming at us from gdp to pce and earnings in there as well but that's more of an equity market story. you are looking at a bond market with a 10-year treasury yield at 3.47%. look at what this week has brought us which is a rally and the yield is moved eight basis points lower on the week.we will continue to watch that story and that all next week from new york, that does it for us, same time, same place next

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>> welcome to the bnn, bloomberg and bloomberg audiences. i am john hyland with the first word news. air defenses have been sent around moscow after drone attacks. cranes lifted them onto rooftops downtown. the same system was installed in the western suburbs near vladimir putin's official residence. in germany, a meeting of the u.s. and allies on military aid to ukraine has ended. there was no decision on whether germany will provide tanks to the ukrainians, but the new defense minister says berlin could move quickly if an agreement is reached. mayors facing